UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2008
Commission File Number 0-20050
PRINCETON NATIONAL BANCORP, INC.
(Exact name of registrant as specified in its charter)
Delaware |
36-3210283 |
(State or other jurisdiction |
(I.R.S. Employer Identification No.) |
606 S. Main Street, Princeton, IL 61356
(Address of principal executive offices and Zip Code)
(815) 875-4444
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer |
o |
Accelerated filer |
x |
Non-accelerated filer |
o |
Smaller reporting company |
o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No x
As of April 21, 2008, the registrant had outstanding 3,299,490 shares of its $5 par value common stock.
Part I: FINANCIAL INFORMATION
The unaudited consolidated financial statements of Princeton National Bancorp, Inc. and Subsidiary and managements discussion and analysis of financial condition and results of operation are presented in the schedules as follows:
|
Schedule 1: |
Consolidated Balance Sheets |
|
Schedule 2: |
Consolidated Statements of Income |
|
Schedule 3: |
Consolidated Statements of Stockholders Equity |
|
Schedule 4: |
Consolidated Statements of Cash Flows |
|
Schedule 5: |
Notes to Consolidated Financial Statements |
|
Schedule 6: |
Managements Discussion and Analysis of Financial Condition and Results of Operations |
|
Schedule 7: |
Controls and Procedures |
Part II: OTHER INFORMATION
Item 1A. Risk Factors
In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2007, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K are not the only risks facing our Corporation. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.
2
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
|
(c) |
The following table provides information about purchases of the Corporations common stock by the Corporation during the quarter ended March 31, 2008: |
Period |
|
(a) Total number of |
|
(b) Average price paid |
|
(c) Total number |
|
(d) Maximum number |
| |
1/1/08 1/31/08 |
|
0 |
|
$ |
0.00 |
|
0 |
|
40,000 |
|
2/1/08 2/29/08 |
|
5,000 |
|
$ |
25.49 |
|
5,000 |
|
35,000 |
|
3/1/08 3/31/08 |
|
5,000 |
|
$ |
28.50 |
|
5,000 |
|
30,000 |
|
Total |
|
10,000 |
|
$ |
27.00 |
|
10,000 |
|
30,000 |
|
On April 24, 2007, the Board of Directors approved the repurchase of up to an aggregate of 50,000 shares of our common stock pursuant to a repurchase program announced the same day (the Program). The original expiration date of this Program was April 24, 2008, but was extended to October 24, 2008 by the Board of Directors at their meeting held on April 28, 2008. Unless terminated earlier by resolution of our Board of Directors, the Program will expire on the earlier of such expiration date or when we have repurchased all shares authorized for repurchase under the Program.
Item 6. Exhibits
|
31.1 |
Certification of Tony J. Sorcic required by Rule 13a-14(a). |
|
31.2 |
Certification of Todd D. Fanning required by Rule 13a-14(a). |
|
32.1 |
Certification of Tony J. Sorcic required by Rule 13a-14(b) and Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350. |
|
32.2 |
Certification of Todd D. Fanning required by Rule 13a-14(b) and Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
PRINCETON NATIONAL BANCORP, INC.
|
|
|
|
|
By |
/s/ Tony J. Sorcic |
|
By |
/s/ Todd D. Fanning |
|
Tony J. Sorcic |
|
|
Todd D. Fanning |
3
Schedule 1
PRINCETON NATIONAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share data)
|
|
March 31, |
|
December 31 |
| ||
ASSETS |
|
|
|
|
|
|
|
Cash and due from banks |
|
$ |
24,115 |
|
$ |
25,801 |
|
Interest-bearing deposits with financial institutions |
|
|
570 |
|
|
1,803 |
|
Federal funds sold |
|
|
745 |
|
|
0 |
|
|
|
|
|
|
|
|
|
Total cash and cash equivalents |
|
|
25,430 |
|
|
27,604 |
|
|
|
|
|
|
|
|
|
Loans held for sale, at lower of cost or market |
|
|
3,178 |
|
|
928 |
|
|
|
|
|
|
|
|
|
Investment securities: |
|
|
|
|
|
|
|
Available-for-sale, at fair value |
|
|
220,022 |
|
|
218,095 |
|
Held-to-maturity, at amortized cost (fair value of $16,621 and $14,799) |
|
|
16,168 |
|
|
14,578 |
|
|
|
|
|
|
|
|
|
Total investment securities |
|
|
236,190 |
|
|
232,673 |
|
|
|
|
|
|
|
|
|
Loans: |
|
|
|
|
|
|
|
Loans, net of unearned interest |
|
|
729,717 |
|
|
722,647 |
|
Allowance for loan losses |
|
|
(3,134 |
) |
|
(3,248 |
) |
|
|
|
|
|
|
|
|
Net loans |
|
|
726,583 |
|
|
719,399 |
|
|
|
|
|
|
|
|
|
Premises and equipment, net of accumulated depreciation |
|
|
30,466 |
|
|
30,801 |
|
Land held for sale, at lower of cost or market |
|
|
1,344 |
|
|
1,344 |
|
Bank-owned life insurance |
|
|
21,054 |
|
|
22,461 |
|
Accrued interest receivable |
|
|
8,267 |
|
|
10,876 |
|
Goodwill |
|
|
24,521 |
|
|
24,521 |
|
Intangible assets, net of accumulated amortization |
|
|
4,870 |
|
|
5,090 |
|
Other real estate owned |
|
|
605 |
|
|
833 |
|
Other assets |
|
|
4,448 |
|
|
4,172 |
|
|
|
|
|
|
|
|
|
TOTAL ASSETS |
|
$ |
1,086,956 |
|
$ |
1,080,702 |
|
|
|
|
|
|
|
|
|
LIABILITIES |
|
|
|
|
|
|
|
Deposits: |
|
|
|
|
|
|
|
Demand |
|
$ |
105,823 |
|
$ |
102,452 |
|
Interest-bearing demand |
|
|
254,336 |
|
|
241,749 |
|
Savings |
|
|
62,986 |
|
|
58,401 |
|
Time |
|
|
495,993 |
|
|
488,805 |
|
|
|
|
|
|
|
|
|
Total deposits |
|
|
919,138 |
|
|
891,407 |
|
|
|
|
|
|
|
|
|
Borrowings: |
|
|
|
|
|
|
|
Customer repurchase agreements |
|
|
34,482 |
|
|
34,217 |
|
Federal funds purchased |
|
|
0 |
|
|
26,500 |
|
Advances from the Federal Home Loan Bank |
|
|
10,986 |
|
|
6,984 |
|
Interest-bearing demand notes issued to the U.S. Treasury |
|
|
551 |
|
|
1,838 |
|
Trust preferred securities |
|
|
25,000 |
|
|
25,000 |
|
Note payable |
|
|
14,550 |
|
|
14,550 |
|
|
|
|
|
|
|
|
|
Total borrowings |
|
|
85,569 |
|
|
109,089 |
|
|
|
|
|
|
|
|
|
Other liabilities |
|
|
12,048 |
|
|
11,599 |
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES |
|
|
1,016,755 |
|
|
1,012,095 |
|
|
|
|
|
|
|
|
|
STOCKHOLDERS' EQUITY |
|
|
|
|
|
|
|
Common stock: $5 par value, 7,000,000 shares authorized; 4,478,295 issued at March 31, 2008 and December 31, 2007 |
|
|
22,391 |
|
|
22,391 |
|
Surplus |
|
|
18,306 |
|
|
18,275 |
|
Retained earnings |
|
|
51,864 |
|
|
51,279 |
|
Accumulated other comprehensive income, net of tax |
|
|
1,574 |
|
|
344 |
|
Less: Cost of 1,178,805 and 1,169,848 treasury shares at March 31, 2008 and December 31, 2007, respectively |
|
|
(23,934 |
) |
|
(23,682 |
) |
|
|
|
|
|
|
|
|
TOTAL STOCKHOLDERS' EQUITY |
|
|
70,201 |
|
|
68,607 |
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY |
|
$ |
1,086,956 |
|
$ |
1,080,702 |
|
See accompanying notes to unaudited consolidated financial statements
4
Schedule 2
PRINCETON NATIONAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(dollars in thousands, except share data)
|
|
For the Three Months |
| ||||
|
|
2008 |
|
2007 |
| ||
Interest income: |
|
|
|
|
|
|
|
Interest and fees on loans |
|
$ |
12,350 |
|
$ |
11,607 |
|
Interest on investment securities: |
|
|
|
|
|
|
|
Taxable |
|
|
1,617 |
|
|
1,885 |
|
Non-taxable |
|
|
1,062 |
|
|
1,128 |
|
Interest on federal funds sold |
|
|
25 |
|
|
147 |
|
Interest on interest-bearing time deposits in other banks |
|
|
12 |
|
|
50 |
|
|
|
|
|
|
|
|
|
Total interest income |
|
|
15,066 |
|
|
14,817 |
|
|
|
|
|
|
|
|
|
Interest expense: |
|
|
|
|
|
|
|
Interest on deposits |
|
|
6,674 |
|
|
7,478 |
|
Interest on borrowings |
|
|
938 |
|
|
947 |
|
|
|
|
|
|
|
|
|
Total interest expense |
|
|
7,612 |
|
|
8,425 |
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
7,454 |
|
|
6,392 |
|
Provision for loan losses |
|
|
368 |
|
|
185 |
|
|
|
|
|
|
|
|
|
Net interest income after provision for loan losses |
|
|
7,086 |
|
|
6,207 |
|
|
|
|
|
|
|
|
|
Non-interest income: |
|
|
|
|
|
|
|
Trust & farm management fees |
|
|
476 |
|
|
414 |
|
Service charges on deposit accounts |
|
|
1,092 |
|
|
990 |
|
Other service charges |
|
|
457 |
|
|
461 |
|
Gain on sales of securities available-for-sale |
|
|
276 |
|
|
47 |
|
Brokerage fee income |
|
|
219 |
|
|
203 |
|
Mortgage banking income |
|
|
348 |
|
|
272 |
|
Bank-owned life insurance income |
|
|
215 |
|
|
196 |
|
Other operating income |
|
|
70 |
|
|
62 |
|
|
|
|
|
|
|
|
|
Total non-interest income |
|
|
3,153 |
|
|
2,645 |
|
|
|
|
|
|
|
|
|
Non-interest expense: |
|
|
|
|
|
|
|
Salaries and employee benefits |
|
|
4,398 |
|
|
4,180 |
|
Occupancy |
|
|
679 |
|
|
602 |
|
Equipment expense |
|
|
718 |
|
|
779 |
|
Federal insurance assessments |
|
|
84 |
|
|
85 |
|
Intangible assets amortization |
|
|
179 |
|
|
188 |
|
Data processing |
|
|
277 |
|
|
272 |
|
Advertising |
|
|
168 |
|
|
173 |
|
Other operating expense |
|
|
1,057 |
|
|
994 |
|
|
|
|
|
|
|
|
|
Total non-interest expense |
|
|
7,560 |
|
|
7,273 |
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
2,679 |
|
|
1,579 |
|
Income tax expense |
|
|
589 |
|
|
150 |
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
2,090 |
|
$ |
1,429 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share: |
|
|
|
|
|
|
|
Basic |
|
|
0.63 |
|
|
0.43 |
|
Diluted |
|
|
0.63 |
|
|
0.42 |
|
|
|
|
|
|
|
|
|
Basic weighted average shares outstanding |
|
|
3,304,063 |
|
|
3,347,099 |
|
Diluted weighted average shares outstanding |
|
|
3,309,907 |
|
|
3,363,959 |
|
See accompanying notes to unaudited consolidated financial statements
5
Schedule 3
PRINCETON NATIONAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Unaudited)
(dollars in thousands except per share data)
For the Three Months Ended |
|
Common |
|
Surplus |
|
Retained |
|
Accumulated |
|
Treasury |
|
Total |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Balance, January 1, 2008 |
|
$ |
22,391 |
|
$ |
18,275 |
|
$ |
51,279 |
|
$ |
344 |
|
$ |
(23,682 |
) |
$ |
68,607 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
2,090 |
|
|
|
|
|
|
|
|
2,090 |
|
Purchase of 40,000 shares of treasury stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(270 |
) |
|
(270 |
) |
Sale of 4,314 shares of treasury stock |
|
|
|
|
|
10 |
|
|
|
|
|
|
|
|
18 |
|
|
28 |
|
Cash dividends |
|
|
|
|
|
|
|
|
(926 |
) |
|
|
|
|
|
|
|
(926 |
) |
Stock option compensation expense |
|
|
|
|
|
21 |
|
|
|
|
|
|
|
|
|
|
|
21 |
|
Adjustment to apply EITF 06-4 |
|
|
|
|
|
|
|
|
(579 |
) |
|
|
|
|
|
|
|
(579 |
) |
Other comprehensive income, net of $778 tax effect |
|
|
|
|
|
|
|
|
|
|
|
1,230 |
|
|
|
|
|
1,230 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, March 31, 2008 |
|
$ |
22,391 |
|
$ |
18,306 |
|
$ |
51,864 |
|
$ |
1,574 |
|
$ |
(23,934 |
) |
$ |
70,201 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, January 1, 2007 |
|
$ |
22,391 |
|
$ |
18,158 |
|
$ |
48,109 |
|
$ |
(960 |
) |
$ |
(22,343 |
) |
$ |
65,355 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
1,429 |
|
|
|
|
|
|
|
|
1,429 |
|
Purchase of 10,000 shares of treasury stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(320 |
) |
|
(320 |
) |
Sale of 1,013 shares of treasury stock |
|
|
|
|
|
13 |
|
|
|
|
|
|
|
|
17 |
|
|
30 |
|
Cash dividends |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($.27 per share) |
|
|
|
|
|
|
|
|
(904 |
) |
|
|
|
|
|
|
|
(904 |
) |
Stock option compensation expense |
|
|
|
|
|
12 |
|
|
|
|
|
|
|
|
|
|
|
12 |
|
Other comprehensive income, net of $134 tax effect |
|
|
|
|
|
|
|
|
|
|
|
212 |
|
|
|
|
|
212 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, March 31, 2007 |
|
$ |
22,391 |
|
$ |
18,183 |
|
$ |
48,634 |
|
$ |
(748 |
) |
$ |
(22,646 |
) |
$ |
65,814 |
|
See accompanying notes to unaudited consolidated financial statements
6
Schedule 4
PRINCETON NATIONAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(dollars in thousands)
|
|
For the Three Months Ended |
| ||||
|
|
2008 |
|
2007 |
| ||
Operating activities: |
|
|
|
|
|
|
|
Net income |
|
$ |
2,090 |
|
$ |
1,429 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
Depreciation |
|
|
574 |
|
|
613 |
|
Provision for loan losses |
|
|
368 |
|
|
185 |
|
Amortization of intangible assets and other purchase accounting adjustments, net |
|
|
208 |
|
|
188 |
|
Amortization (accretion) of premiums and discounts on investment securities, net |
|
|
(33 |
) |
|
(84 |
) |
Gain on sales of securities available-for-sale, net |
|
|
(276 |
) |
|
(47 |
) |
Compensation expense for vested stock options |
|
|
21 |
|
|
12 |
|
Gain on sales of other real estate owned, net |
|
|
7 |
|
|
0 |
|
Loans originated for sale |
|
|
(33,037 |
) |
|
(7,481 |
) |
Proceeds from sales of loans originated for sale |
|
|
30,787 |
|
|
10,416 |
|
Increase in accrued interest payable |
|
|
16 |
|
|
240 |
|
Decrease in accrued interest receivable |
|
|
2,609 |
|
|
2,257 |
|
Decrease (increase) in other assets |
|
|
1,131 |
|
|
(1,019 |
) |
Decrease in other liabilities |
|
|
(919 |
) |
|
(810 |
) |
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
3,546 |
|
|
5,899 |
|
|
|
|
|
|
|
|
|
Investing activities: |
|
|
|
|
|
|
|
Proceeds from sales of investment securities available-for-sale |
|
|
8,670 |
|
|
5,018 |
|
Proceeds from maturities of investment securities available-for-sale |
|
|
13,789 |
|
|
15,380 |
|
Purchase of investment securities available-for-sale |
|
|
(22,691 |
) |
|
(6,044 |
) |
Proceeds from maturities of investment securities held-to-maturity |
|
|
580 |
|
|
645 |
|
Purchase of investment securities held-to-maturity |
|
|
(1,594 |
) |
|
(1,075 |
) |
Proceeds from sales of other real estate owned |
|
|
263 |
|
|
0 |
|
Net increase in loans |
|
|
(7,539 |
) |
|
(10,334 |
) |
Purchases of premises and equipment |
|
|
(239 |
) |
|
(725 |
) |
Payments related to acquisition, net of cash and cash equivalents acquired |
|
|
0 |
|
|
(10,110 |
) |
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(8,761 |
) |
|
(7,245 |
) |
|
|
|
|
|
|
|
|
Financing activities: |
|
|
|
|
|
|
|
Net increase (decrease) in deposits |
|
|
27,731 |
|
|
(10,712 |
) |
Net decrease in borrowings |
|
|
(23,522 |
) |
|
(873 |
) |
Dividends paid |
|
|
(926 |
) |
|
(904 |
) |
Purchases of treasury stock |
|
|
(270 |
) |
|
(320 |
) |
Sales of treasury stock |
|
|
28 |
|
|
30 |
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
|
3,041 |
|
|
(12,779 |
) |
|
|
|
|
|
|
|
|
Decrease in cash and cash equivalents |
|
|
(2,174 |
) |
|
(14,125 |
) |
Cash and cash equivalents at beginning of period |
|
|
27,604 |
|
|
39,185 |
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at March 31 |
|
$ |
25,430 |
|
$ |
25,060 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information: |
|
|
|
|
|
|
|
Cash paid during the period for: |
|
|
|
|
|
|
|
Interest |
|
$ |
7,596 |
|
$ |
8,185 |
|
Income taxes |
|
$ |
620 |
|
$ |
680 |
|
|
|
|
|
|
|
|
|
Supplemental disclosures of non-cash flow activities: |
|
|
|
|
|
|
|
Loans transferred to other real estate owned |
|
$ |
42 |
|
$ |
482 |
|
Land transferred to held for sale |
|
$ |
0 |
|
$ |
1,344 |
|
See accompanying notes to unaudited consolidated financial statements
7
Schedule 5
PRINCETON NATIONAL BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Unaudited)
The accompanying unaudited condensed consolidated financial statements reflect all adjustments, which, in the opinion of management, are necessary for a fair presentation of the results of the interim periods ended March 31, 2008 and 2007, and all such adjustments are of a normal recurring nature. The 2007 year-end consolidated balance sheet data was derived from audited financial statements, but do not include all disclosures required by generally accepted accounting principles.
The unaudited consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and do not include all of the information required by accounting principles generally accepted in the United States of America for complete financial statements and related footnote disclosures. In the opinion of management, all adjustments (consisting only of normal recurring accruals) considered for a fair presentation of the results for the interim period have been included. For further information, refer to the consolidated financial statements and notes included in the Registrant's 2007 Annual Report on Form 10-K. Results of operations for interim periods are not necessarily indicative of the results that may be expected for the year. Certain amounts in the 2007 consolidated financial statements have been reclassified to conform to the 2008 presentation.
(1) EARNINGS PER SHARE CALCULATION
The following table sets forth the computation of basic and diluted earnings per share for the periods indicated (in thousands, except share data):
|
|
Three Months Ended |
| ||||
|
|
2008 |
|
2007 |
| ||
Numerator: |
|
|
|
|
|
|
|
Net income |
|
$ |
2,090 |
|
$ |
1,429 |
|
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
Basic earnings per share- |
|
|
3,304,063 |
|
|
3,347,099 |
|
|
|
|
|
|
|
|
|
Effect of dilutive securities- |
|
|
5,844 |
|
|
16,860 |
|
Diluted earnings per share- |
|
|
3,309,907 |
|
|
3,363,959 |
|
|
|
|
|
|
|
|
|
Net income per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.63 |
|
$ |
0.43 |
|
Diluted |
|
$ |
0.63 |
|
$ |
0.42 |
|
The earnings per share calculation for the three months ended, March 31, 2008 and 2007 does not include 279,816 shares and 160,283 shares, respectively, which were anti-dilutive.
8
(2) ACQUISITION
On February 23, 2007, the Corporation completed the acquisition of the Plainfield office of HomeStar Bank in Manteno, Illinois, for $10.2 million in cash, including goodwill of $1.5 million, in order to expand its market presence in the area. The Corporation purchased the existing facility for $4.5 million plus $17.0 million in loans (at book value) and assumed $12.9 million in deposit liabilities. The Plainfield office operates as a branch of the subsidiary bank.
The transaction has been accounted for as a purchase, and the results of operations of the Plainfield office since the acquisition date have been included in the consolidated financial statements. The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of this transaction (in thousands):
Cash and cash equivalents |
|
$ |
93 |
|
Loans |
|
|
17,043 |
|
Premises and equipment |
|
|
4,500 |
|
Goodwill |
|
|
1,492 |
|
Other assets |
|
|
85 |
|
Total assets acquired |
|
|
23,213 |
|
Deposits |
|
|
12,865 |
|
Other liabilities |
|
|
145 |
|
Total liabilities assumed |
|
|
13,010 |
|
Net assets acquired |
|
$ |
10,203 |
|
Transaction costs related to the completion of the transaction were considered immaterial. The total fair value of the assets and liabilities acquired exceeded the book value, resulting in goodwill of $1,492,000 which is not subject to amortization.
The following unaudited pro forma condensed combined financial information presents the results of operations of the Corporation, including the effects of the purchase accounting adjustments, had the acquisition taken place at the beginning of each period (in thousands):
9
|
|
For the three months ended |
| |
Net interest income |
|
$ |
6,432 |
|
Provision for loan losses |
|
|
185 |
|
Non-interest income |
|
|
2,680 |
|
Non-interest expense |
|
|
7,288 |
|
Income before income taxes |
|
|
1,639 |
|
Income tax expense |
|
|
174 |
|
Net income |
|
$ |
1,465 |
|
|
|
|
|
|
Earnings per share |
|
|
|
|
Basic |
|
$ |
0.44 |
|
Diluted |
|
$ |
0.44 |
|
|
|
|
|
|
Basic weighted average shares outstanding |
|
|
3,347,099 |
|
Diluted weighted average shares outstanding |
|
|
3,363,959 |
|
The unaudited pro forma condensed combined financial statements do not reflect any anticipated cost savings and revenue enhancements. Additionally, the income statement for the first three months of 2007 includes merger-related expenses. Accordingly, the pro forma results of operations of the Corporation as of and after the merger may not be indicative of the results that actually would have occurred if the merger had been in effect during the period presented or of the results that may be attained in the future.
(3) GOODWILL AND INTANGIBLE ASSETS
The balance of goodwill, net of accumulated amortization, totaled $24,521,000 at March 31, 2008 and December 31, 2007. The balance of intangible assets, net of accumulated amortization, totaled $4,870,000 and $5,090,000 at March 31, 2008 and December 31, 2007, respectively.
The following table summarizes the Corporations intangible assets, which are subject to amortization, as of March 31, 2008 and December 31, 2007:
10
(in thousands)
|
|
2008 |
|
2007 |
| ||||||||
|
|
Gross Carrying |
|
Accumulated |
|
Gross Carrying |
|
Accumulated |
| ||||
Core deposit intangible |
|
$ |
9,004 |
|
$ |
(4,223 |
) |
$ |
9,004 |
|
$ |
(4,006 |
) |
Other intangible assets |
|
|
234 |
|
|
(145 |
) |
|
234 |
|
|
(142 |
) |
Total |
|
$ |
9,238 |
|
$ |
(4,368 |
) |
$ |
9,238 |
|
$ |
(4,148 |
) |
Amortization expense of all intangible assets totaled $179,000 for the three months ended March 31, 2008 and $188,000 for the three months ended March 31, 2007, respectively. The amortization expense of these intangible assets will be approximately $179,000 for the each of the remaining quarters in 2008.
The Corporation has originated mortgage servicing rights which are included in other assets on the consolidated balance sheets. Mortgage servicing rights are amortized in proportion to, and over the period of, estimated net servicing income on a basis similar to the interest method using an accelerated amortization method and are subject to periodic impairment testing. As of March 31, 2008, no impairment had been recorded during the year. Changes in the carrying value of capitalized mortgage servicing rights are summarized as follows:
(in thousands) |
|
|
| |
|
|
|
|
|
Balance, January 1, 2008 |
|
$ |
2,498 |
|
Servicing rights capitalized |
|
|
325 |
|
Amortization of servicing rights |
|
|
(172 |
) |
Impairment of servicing rights |
|
|
0 |
|
Balance, March 31, 2008 |
|
$ |
2,651 |
|
The Corporation services loans for others with unpaid principal balances at March 31, 2008 and December 31, 2007 of approximately $280,873,000, and $268,391,000, respectively.
The following table shows the future estimated amortization expense for mortgage servicing rights based on existing balances as of March 31, 2008. The Corporations actual amortization expense in any given period may be significantly different from the estimated amounts displayed depending on the amount of additional mortgage servicing rights, changes in mortgage interest rates, estimated prepayment speeds, and market conditions.
Estimated Amortization Expense:
|
|
Amount (in thousands) |
| |
For the nine months ended December 31, 2008 |
|
$ |
224 |
|
For the year ended December 31, 2009 |
|
|
284 |
|
For the year ended December 31, 2010 |
|
|
267 |
|
For the year ended December 31, 2011 |
|
|
250 |
|
For the year ended December 31, 2012 |
|
|
235 |
|
For the year ended December 31, 2013 |
|
|
220 |
|
Thereafter |
|
|
1,171 |
|
11
(4) COMPREHENSIVE INCOME
Other comprehensive income components and related taxes for the three months ended March 31, 2008 and 2007 were as follows:
(in thousands)
|
|
2008 |
|
2007 |
| ||
Net unrealized gains on securities available-for-sale |
|
$ |
2,280 |
|
$ |
393 |
|
Less: Reclassification adjustment for realized gains included in income |
|
|
(276 |
) |
|
(47 |
) |
|
|
|
2,004 |
|
|
346 |
|
|
|
|
|
|
|
|
|
Amortization of transition obligation of post retirement health care |
|
|
4 |
|
|
0 |
|
|
|
|
|
|
|
|
|
Other comprehensive income, before tax effect |
|
|
2,008 |
|
|
346 |
|
|
|
|
|
|
|
|
|
Tax expense |
|
|
778 |
|
|
134 |
|
|
|
|
|
|
|
|
|
Other comprehensive income |
|
$ |
1,230 |
|
$ |
212 |
|
The components of accumulated other comprehensive income (loss), included in stockholders equity at March 31, 2008 and 2007 are as follows:
|
|
2008 |
|
2007 |
| ||
Net unrealized gain (loss) on securities available-for-sale |
|
$ |
3,121 |
|
$ |
(205 |
) |
Net unrealized benefit obligations |
|
|
(552 |
) |
|
(1,016 |
) |
|
|
|
2,569 |
|
|
(1,221 |
) |
|
|
|
|
|
|
|
|
Tax effect |
|
|
(995 |
) |
|
473 |
|
|
|
|
|
|
|
|
|
Net-of-tax amount |
|
$ |
1,574 |
|
$ |
(748 |
) |
5) FEDERAL HOME LOAN BANK STOCK
Investment securities available-for-sale includes Federal Home Loan Bank stock totaling $2,373,000 at March 31, 2008 and December 31, 2007. During the third quarter of 2007, the Federal Home Loan Bank of Chicago received a Cease and Desist Order from their regulator, the Federal Housing Finance Board. The order prohibits capital stock repurchase and redemptions until a time to be determined by the Federal Housing Finance Board. The Federal Home Loan Bank will continue to provide funding through advances. The Federal Home Loan Bank recently announced it will no longer fund purchases through its MPF Program after July 31, 2008. With regard to dividends, the Federal Home Loan Bank will continue to assess their dividend capacity each quarter and make appropriate request for approval. There were no dividends paid by the Federal Home Loan Bank of Chicago during the first quarter of 2008. Management performed an analysis and deemed the investment in Federal Home Loan Bank stock was not impaired as of March 31, 2008 or December 31, 2007.
12
(6) FDIC ONE-TIME ASSESSMENT CREDIT
Effective November 17, 2006, the FDIC implemented a one-time credit of $4.7 billion to eligible institutions. The purpose of the credit is to recognize contributions made by certain institutions to capitalize the Bank Insurance Fund and Savings Association Insurance Fund, which have now been merged into the Deposit Insurance Fund. The Bank is an eligible institution and received notice from the FDIC that its share of the credit was $647,000. This amount is not reflected in the accompanying financial statements as it represents contingent future credits against future insurance assessment payments. As such, the timing and ultimate recoverability of the one-time credit may change. In 2008 and 2007, FDIC premium credits received totaled $135,000 and $381,000, respectively, against the premium expense, leaving a remaining credit of $131,000, as of March 31, 2008, to offset future premium expense.
(7) CHANGE IN ACCOUNTING PRINCIPLE
The Financial Accounting Standards Board Emerging Issues Task Force (EITF) issued EITF No. 06-4 Accounting for Deferred Compensation and Post Retirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements, which requires the Company to recognize a liability and compensation expense for endorsement split-dollar life insurance arrangements that provide a benefit to an employee that extends to post retirement periods. The benefit to the employees is the payment of the premiums by the Company. The Company adopted EITF 06-4 as of January 1, 2008, through a cumulative effect adjustment as a liability and a decrease to retained earnings of $579,000. Beginning January 1, 2008, an expense is being recorded as the remaining benefit is earned with a corresponding addition to the post retirement benefit obligation. The amount of the expense for 2008 is estimated to be approximately $59,000. For the period from retirement to the estimated date of death for the participants, this liability is reversed into income.
(8) FAIR VALUE OF ASSETS AND LIABILITIES
Effective January 1, 2008, the Company adopted Statement of Financial Accounting Standards No. 157 (FAS 157), Fair Value Measurements. FAS 157 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. FAS 157 has been applied prospectively as of the beginning of the period.
FAS 157 defines the fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. FAS 157 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
In accordance with FAS 157, the Company groups its financial assets and financial liabilities measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are:
13
|
Level 1 |
Valuations for assets and liabilities traded in active exchange markets, such as the New York Stock Exchange. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities. |
|
Level 2 |
Valuations for assets and liabilities traded in less active dealer or broker markets. Valuations are obtained from third party pricing services for identical or comparable assets or liabilities which use observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets and liabilities. |
|
Level 3 |
Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. |
Following is a description of the valuation methodologies used for instruments measured at fair value on a recurring basis and recognized in the accompanying balance sheet.
Available-for-Sale Securities
The fair value of available-for-sale securities are determined by various valuation methodologies. Where quoted market prices are available in an active market, securities are classified within Level 1. The Company has no securities classified within Level 1. If quoted market prices are not available, then fair values are estimated by using pricing models or quoted prices of securities with similar characteristics. Level 2 securities include U.S. Treasury securities, Obligations of U.S. government corporations and agencies, Obligations of states and political subdivisions, mortgage-backed securities, collateralized mortgage obligations and corporate bonds. In certain cases where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy. The Company has no securities classified within Level 3.
The following table presents the Companys assets that are measured at fair value on a recurring basis and the level within the FAS 157 hierarchy in which the fair value measurements fall as of March 31, 2008 (in thousands):
|
|
Fair Value Measurements Using |
| ||||||||||
|
|
Fair Value |
|
Quoted Prices in Active Markets for |
|
Significant Other |
|
Significant |
| ||||
Available-for-sale securities |
|
$ |
220,022 |
|
$ |
0 |
|
$ |
220,022 |
|
$ |
0 |
|
14
In February 2007, the FASB issued SFAS No. 159 (FAS 159), The Fair Value Option for Financial Assets and Financial Liabilities Including an amendment of FASB Statement No. 115. FAS 159 allows companies to report selected financial assets and liabilities at fair value. The changes in fair value are recognized in earnings and the assets and liabilities measured under this methodology are required to be displayed separately in the balance sheet. The main intent of the Statement is to mitigate the difficulty in determining reported earnings caused by a mixed-attribute model (or reporting some assets at fair value and others using a different valuation attribute such as amortized cost). The project is separated into two phases. This first phase addresses the creation of a fair value option for financial assets and liabilities. A second phase will address creating a fair value option for selected non-financial items. FAS 159 is effective for all financial statements issued for fiscal years beginning after November 15, 2007. The Corporation has not elected the fair value option for any financial assets or liabilities at March 31, 2008.
(9) IMPACT OF NEW ACCOUNTING STANDARDS
In September 2006, the FASB issued Statement of Financial Accounting Standards No. 158 (FAS 158), Employers Accounting for Defined Benefit Pension and Other Postretirement Plans an amendment of FASB Statements 87, 88, 106, and 132 (R), which requires recognition of a net liability or asset to report the funded status of defined benefit pension and other postretirement plans on the balance sheet and recognition (as a component of other comprehensive income) of changes in the funded status in the year in which the changes occur. Additionally, FAS 158 requires measurement of a plans assets and obligations as of the balance sheet date and additional annual disclosures in the notes to the financial statements. The recognition and disclosure provisions of FAS 158 were adopted during 2006, while the requirement to measure a plans assets and obligations as of the balance sheet date is effective for fiscal years ending after December 15, 2008. The Corporation does not expect the adoption of the measurement provisions to have a material impact on its financial reporting and disclosures.
In December 2007, the FASB issued SFAS No. 141R (FAS 141R), Business Combinations, which revises FAS 141 and changes multiple aspects of the accounting for business combinations. Under the guidance in FAS 141R, the acquisition method must be used, which requires the acquirer to recognize most identifiable assets acquired, liabilities assumed, and non-controlling interests in the acquiree at their full fair value on the acquisition date. Goodwill is to be recognized as the excess of the consideration transferred plus the fair value of the non-controlling interest over the fair values of the identifiable net assets acquired. Subsequent changes in the fair value of contingent consideration classified as a liability are to be recognized in earnings, while contingent consideration classified as equity is not to be re-measured. Costs such as transaction costs are to be excluded from acquisition accounting, generally leading to recognizing expense and additionally, restructuring costs that do not meet certain criteria at acquisition date are to be subsequently recognized as post-acquisition costs. FAS 141R is effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The Company is currently evaluating the impact that this issuance will have on its financial position and results of operations; however, it anticipates that the standard will lead to more volatility in the results of operations during the periods subsequent to an acquisition.
15
In December 2007, the FASB issued SFAS No. 160 (FAS 160), Non-controlling Interest in Consolidated Financial Statements an amendment of ARB No. 51. FAS 160 requires that a non-controlling interest in a subsidiary (i.e. minority interest) be reported in the equity section of the balance sheet instead of being reported as a liability or in the mezzanine section between debt and equity. It also requires that the consolidated income statement include consolidated net income attributable to both the parent and non-controlling interest of a consolidated subsidiary. A disclosure must be made on the face of the consolidated income statement of the net income attributable to the parent and to the non-controlling interest. Also, regardless of whether the parent purchases additional ownership interest, sells a portion of its ownership interest in a subsidiary or the subsidiary participates in a transaction that changes the parents ownership interest, as long as the parent retains controlling interest, the transaction is considered an equity transaction. FAS 160 is effective for annual periods beginning after December 15, 2008. The Company is currently evaluating the impact that this standard will have on its financial position and results of operations.
In March 2008, the FASB issued SFAS No. 161 (FAS 161), Disclosures About Derivative Instruments and Hedging Activities an amendment of FAS 133. FAS 161 requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative agreements. FAS 161 is effective for fiscal years beginning after November 15, 2008. The Company does not expect the implementation of FAS 161 to have a material impact on its consolidated financial statements.
16
Schedule 6
PRINCETON NATIONAL BANCORP, INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
For the three months ended March 31, 2008 and 2007
The following discussion provides information about Princeton National Bancorp, Inc.'s (PNBC or the Corporation) financial condition and results of operations for the quarters ended March 31, 2008 and 2007. This discussion should be read in conjunction with the attached consolidated financial statements and notes thereto. Certain statements in this report constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including, but not limited to those statements that include the words believes, expects, anticipates, estimates, or similar expressions. PNBC cautions that such forward-looking statements involve risks and uncertainties that may cause actual results to differ materially from those expressed or implied. Such risks and uncertainties include potential change in interest rates, competitive factors in the financial services industry, general economic conditions, the effect of new legislation, and other risks detailed in documents filed by the Corporation with the Securities and Exchange Commission from time to time.
RESULTS OF OPERATIONS
Net income for the first quarter of 2008 was $2,090,000, or basic and diluted earnings per share of $0.63, as compared to net income of $1,429,000 in the first quarter of 2007, or basic earnings per share of $0.43 and diluted earnings per share of $0.42. This represents an increase of $661,000 (46.3%) or $.20 per basic share and $.21 per diluted share. The higher net income figure is attributable to an increase in the net tax equivalent yield on interest-earning assets from 3.11% for the first quarter of 2007 to 3.39% in the first quarter of 2008, which is discussed in the paragraph below, along with increases in non-interest income, particularly, security gains, mortgage banking income and service charges on deposits. The annualized return on average assets and return on average equity were 0.78% and 12.22%, respectively, for the first quarter of 2008, compared with 0.57% and 8.80% for the first quarter of 2007.
Net interest income before the provision for loan losses was $7,454,000 for the first quarter of 2008, compared to $6,392,000 for the first quarter of 2007 (an increase of $1,062,000 or 16.6%). As mentioned in the paragraph above, there has been an increase in the net yield on interest-earning assets (on a fully taxable equivalent basis) to 3.39% in the first quarter of 2008 from 3.11% in the first quarter of 2007. This, along with an increase in average interest-earning assets of $40.3 million over the past twelve months, caused the increase to net interest income.
The Corporations provision for loan loss expense recorded each quarter is determined by managements evaluation of the risk characteristics of the loan portfolio. For the first quarter of 2008, PNBC had net charge-offs of $481,000, compared to net charge-offs of $101,000 for the first quarter of 2007. PNBC recorded a loan loss provision of $368,000 in the first quarter of 2008 compared to a provision of $185,000 in the first quarter of 2007.
17
Non-interest income totaled $3,153,000 for the first quarter of 2008, compared to $2,645,000 in the first quarter of 2007, an increase of $508,000 (or 19.2%). The categories of service charges on deposits, mortgage banking income and trust and farm management fees recorded the largest increases of $102,000, $76,000 and $62,000, respectively, due to increases in the volume of transactions. Additionally, the Corporation recorded gains from the sales of securities available-for-sale of $276,000 in the first three months of 2008 compared to $47,000 for the first three months of 2007. Annualized non-interest income as a percentage of total average assets increased from 1.05% for the first three months of 2007, to 1.18% for the same period in 2008.
Total non-interest expense for the first quarter of 2008 was $7,560,000, an increase of $287,000 (or 3.9%) from $7,273,000 in the first quarter of 2007. However, total non-interest expense increased only $48,000 (or 0.6%) from the $7,512,000 reported in the fourth quarter of 2007. The largest difference between the first quarters of 2008 and 2007 was an increase in salaries/employee benefits of $218,000, an increase of 5.2%. Smaller increases were seen in the categories of other operating expense and occupancy expense, which increased $63,000 and $77,000, respectively. Offsetting these increases was a decrease in equipment expense of $61,000. Annualized non-interest expense as a percentage of total average assets decreased to 2.83% for the first three months of 2008, compared to 2.87% for the same period in 2007.
INCOME TAXES
Income tax expense totaled $589,000 for the first quarter of 2008, as compared to $150,000 for the first quarter of 2007. The effective tax rate was 22.0% for the three month period ended March 31, 2008 and 9.5% for the three month period ended March 31, 2007. The higher effective tax rate in 2008 is due to a higher pre-tax income.
ANALYSIS OF FINANCIAL CONDITION
Total assets at March 31, 2008 increased to $1,086,956,000 from $1,080,702,000 at December 31, 2007 (an increase of $6.3 million or 0.6%). Investment balances totaled $236,190,000 at March 31, 2008, compared to $232,673,000 at December 31, 2007 (an increase of $3.5 million or 1.5%). Total deposits increased to $919,138,000 at March 31, 2008 from $891,407,000 at December 31, 2007 (an increase of $27.7 million or 3.1%). Comparing categories of deposits at March 31, 2008 to December 31, 2007, interest-bearing demand deposits increased $12.6 million (or 5.2%), time deposits increased $7.2 million (or 1.5%), savings deposits increased $4.6 million (or 7.9%), and demand deposits increased $3.4 million (or 3.3%). Borrowings, consisting of customer repurchase agreements, notes payable, treasury, tax, and loan (TT&L) deposits, and Federal Home Loan Bank advances, decreased from $109,089,000 at December 31, 2007 to $85,569,000 at March 31, 2008 (a decrease of $23.5 million or 21.6%).
Loan balances, net of unearned interest, increased slightly to $729,717,000 at March 31, 2008, compared to $722,647,000 at December 31, 2007 (an increase of $7.1 million or 1.0%). Non-performing loans increased to $14,110,000 or 1.93% of net loans at March 31, 2008, as compared to $4,909,000 or 0.75% of net loans at December 31, 2007. Although non-performing loans have increased in terms of total dollars, the increase is comprised of two larger credits with substantial collateral. All loans are individually evaluated and management continues to maintain adequate reserves in the allowance for loan losses.
18
ASSET QUALITY
For the three months ended March 31, 2008, the subsidiary bank charged off $546,000 of loans and had recoveries of $65,000, compared to charge-offs of $176,000 and recoveries of $75,000 during the three months ended March 31, 2007. The allowance for loan losses is based on factors that include the overall composition of the loan portfolio, types of loans, underlying collateral, past loss experience, loan delinquencies, substandard and doubtful credits, and such other factors that, in management's reasonable judgment, warrant consideration. The adequacy of the allowance is monitored monthly. At March 31, 2008, the allowance was $3,134,000 which is 22.2% of non-performing loans and 0.43% of total loans, compared with $3,248,000 which was 43.7% of non-performing loans and 0.45% of total loans at December 31, 2007. Although the balance of non-performing loans has increased, management has reviewed these loans and deemed they are adequately collateralized.
At March 31, 2008 non-accrual loans were $13,471,000 compared to $7,361,000 at December 31, 2007. Impaired loans totaled $10,026,000 at March 31, 2008 compared to $4,523,000 at December 31, 2007. The total amount of loans ninety days or more past due and still accruing interest at March 31, 2008 was $639,000 compared to $73,000 at December 31, 2007. There was a specific loan loss reserve of $190,000 established for impaired loans as of March 31, 2008 compared to a specific loan loss reserve of $207,000 at December 31, 2007. PNBCs management analyzes the allowance for loan losses monthly and believes the current level of allowance is adequate to meet probable losses as of March 31, 2008.
CAPITAL RESOURCES
Federal regulations require all financial institutions to evaluate capital adequacy by the risk-based capital method, which makes capital requirements more sensitive to the differences in the level of risk assets. At March 31, 2008, total risk-based capital of PNBC was 8.35%, compared to 8.41% at December 31, 2007. The Tier 1 capital ratio decreased from 6.16% at December 31, 2007, to 6.12% at March 31, 2008. Total stockholders' equity to total assets at March 31, 2008 increased to 6.46% from 6.35% at December 31, 2007.
LIQUIDITY
Liquidity is measured by a financial institution's ability to raise funds through deposits, borrowed funds, capital, or the sale of assets. Additional sources of liquidity include cash flow from the repayment of loans and the maturity of investment securities. Major uses of cash include the origination of loans and purchase of investment securities. Cash flows used in investing activities, offset by those provided by operating and financing activities, resulted in a net decrease in cash and cash equivalents of $2,174,000 from December 31, 2007 to March 31, 2008. This decrease was primarily due to a net decrease in borrowings along with a net increase in loans and investments, offset by an increase in deposits. For more detailed information, see PNBC's Consolidated Statements of Cash Flows.
FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Corporation generates agribusiness, commercial, mortgage and consumer loans to customers located primarily in North Central Illinois. The Corporations loans are generally secured by specific items of collateral including real property, consumer assets and business assets. Although the Corporation has a diversified loan portfolio, a substantial portion of its debtors ability to honor their contracts is dependent upon economic conditions in the agricultural industry.
19
In the normal course of business to meet the financing needs of its customers, the subsidiary bank is party to financial instruments with off-balance sheet risk. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets. The contract amounts of those instruments reflect the extent of involvement the subsidiary bank has in particular classes of financial instruments.
The subsidiary bank's exposure to credit loss in the event of non-performance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual notional amount of those instruments. The subsidiary bank uses the same credit policies in making commitments and conditional obligations as they do for on-balance-sheet instruments. At March 31, 2008, commitments to extend credit and standby letters of credit were approximately $144,747,000 and $8,389,000 respectively.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The subsidiary bank evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary, by the subsidiary bank upon extension of credit is based on management's credit evaluation of the counterparty. Collateral held varies, but may include real estate, accounts receivable, inventory, property, plant and equipment, and income-producing properties.
Standby letters of credit are conditional commitments issued by the subsidiary bank to guarantee the performance of a customer to a third party. The credit risk involved in issuing standby letters of credit is essentially the same as that involved in extending loan facilities to customers. The subsidiary bank secures the standby letters of credit with the same collateral used to secure the loan. The maximum amount of credit that would be extended under standby letters of credit is equal to the off-balance sheet contract amount. The standby letters of credit have terms that expire in one year or less.
MERGERS AND ACQUISITIONS
On February 23, 2007, the Company completed the acquisition, for $10.2 million in cash, of the fixed assets and loans while assuming the deposit liabilities of the Plainfield, Illinois branch of HomeStar Bank in order to expand its market presence in this area. The Company financed the purchase price with existing cash and federal funds sold on the balance sheet at the time of purchase. Since the completion of the merger, the Plainfield location operates as a branch of the Companys subsidiary bank.
The transaction has been accounted for as a purchase, and the results of operations of Plainfield since the acquisition date have been included in the consolidated financial statements.
20
LAND HELD FOR SALE
In 2004, the Corporation purchased approximately 14 acres of land in Aurora, Illinois in anticipation of the construction of a new branch facility. Construction of the facility was completed in May, 2006 with the remaining acreage sub-divided in two lots and the necessary infrastructure completed. These lots, with a cost basis of $1,344,000, were determined to be held for sale as of March 31, 2007. A real estate appraisal has been completed indicating the market value of each lot to be approximately $2,000,000. Accordingly, these lots were removed from the land balance and are now shown on the Corporations balance sheet as land held-for-sale, at the lower of cost or market.
LEGAL PROCEEDINGS
There are various claims pending against the Corporation's subsidiary bank, arising in the normal course of business. Management believes, based upon consultation with legal counsel, that liabilities arising from these proceedings, if any, will not be material to the Corporations financial position or results of operation.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There has been no material change in market risk since December 31, 2007, as reported in PNBC's 2007 Annual Report on Form 10-K.
EFFECTS OF INFLATION
The consolidated financial statements and related consolidated financial data presented herein have been prepared in accordance with accounting principles generally accepted in the United States of America and practices within the banking industry which require the measurement of financial condition and operating results in terms of historical dollars, without considering the changes in the relative purchasing power of money over time due to inflation. Unlike most industrial companies, virtually all the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates have a more significant impact on a financial institution's performance than the effects of general levels of inflation.
21
PRINCETON NATIONAL BANCORP, INC. AND SUBSIDIARY
The following table sets forth (in thousands) details of average balances, interest income and expense, and resulting annualized yields/costs for the Corporation for the periods indicated, reported on a fully taxable equivalent basis, using a tax rate of 34%.
|
|
Three Months Ended, March 31, 2008 |
|
Three Months Ended, March 31, 2007 |
| ||||||||||||
|
|
Average |
|
Interest |
|
Yield/ |
|
Average |
|
Interest |
|
Yield/ |
| ||||
Average Interest-Earning Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing deposits |
|
$ |
1,666 |
|
$ |
12 |
|
2.90% |
|
$ |
4,569 |
|
$ |
50 |
|
4.44% |
|
Taxable investment securities |
|
|
134,622 |
|
|
1,617 |
|
4.83% |
|
|
155,724 |
|
|
1,885 |
|
4.91% |
|
Tax-exempt investment securities |
|
|
95,871 |
|
|
1,609 |
|
6.75% |
|
|
106,940 |
|
|
1,709 |
|
6.48% |
|
Federal funds sold |
|
|
3,678 |
|
|
25 |
|
2.73% |
|
|
10,804 |
|
|
147 |
|
5.52% |
|
Net loans |
|
|
715,719 |
|
|
12,370 |
|
6.95% |
|
|
633,229 |
|
|
11,631 |
|
7.45% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets |
|
|
951,556 |
|
|
15,633 |
|
6.61% |
|
|
911,266 |
|
|
15,422 |
|
6.86% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average non-interest earning assets |
|
|
122,655 |
|
|
|
|
|
|
|
114,624 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total average assets |
|
$ |
1,074,211 |
|
|
|
|
|
|
$ |
1,025,890 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Interest-Bearing Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing demand deposits |
|
$ |
250,520 |
|
|
1,387 |
|
2.23% |
|
$ |
231,312 |
|
|
1,569 |
|
2.75% |
|
Savings deposits |
|
|
60,376 |
|
|
21 |
|
0.14% |
|
|
66,029 |
|
|
74 |
|
0.45% |
|
Time deposits |
|
|
495,143 |
|
|
5,265 |
|
4.28% |
|
|
482,595 |
|
|
5,835 |
|
4.90% |
|
Interest-bearing demand notes issued to the U.S. Treasury |
|
|
741 |
|
|
6 |
|
3.26% |
|
|
929 |
|
|
12 |
|
5.24% |
|
Federal funds purchased |
|
|
3,697 |
|
|
38 |
|
4.13% |
|
|
72 |
|
|
1 |
|
5.63% |
|
Customer repurchase agreements |
|
|
34,447 |
|
|
242 |
|
2.83% |
|
|
29,999 |
|
|
347 |
|
4.69% |
|
Advances from Federal Home Loan Bank |
|
|
9,622 |
|
|
105 |
|
4.39% |
|
|
6,972 |
|
|
87 |
|
5.06% |
|
Trust preferred securities |
|
|
25,000 |
|
|
355 |
|
5.71% |
|
|
25,000 |
|
|
355 |
|
5.76% |
|
Note payable |
|
|
14,550 |
|
|
193 |
|
5.33% |
|
|
8,544 |
|
|
145 |
|
6.88% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities |
|
|
894,096 |
|
|
7,612 |
|
3.42% |
|
|
851,452 |
|
|
8,425 |
|
4.01% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net yield on average interest-earning assets |
|
|
|
|
$ |
8,021 |
|
3.39% |
|
|
|
|
$ |
6,997 |
|
3.11% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average non-interest-bearing liabilities |
|
|
111,505 |
|
|
|
|
|
|
|
108,593 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average stockholders equity |
|
|
68,610 |
|
|
|
|
|
|
|
65,845 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total average liabilities and stockholders' equity |
|
$ |
1,074,211 |
|
|
|
|
|
|
$ |
1,025,890 |
|
|
|
|
|
|
The following table reconciles tax-equivalent net interest income (as shown above) to net interest income as reported on the Consolidated Statements of Income.
|
|
For the Three Months Ended |
| ||||
|
|
2008 |
|
2007 |
| ||
Net interest income as stated |
|
$ |
7,454 |
|
$ |
6,392 |
|
Tax equivalent adjustment-investments |
|
|
547 |
|
|
581 |
|
Tax equivalent adjustment-loans |
|
|
20 |
|
|
24 |
|
|
|
|
|
|
|
|
|
Tax equivalent net interest income |
|
$ |
8,021 |
|
$ |
6,997 |
|
22
Schedule 7. Controls and Procedures
(a) |
Disclosure controls and procedures. We evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of March 31, 2008. Our disclosure controls and procedures are the controls and other procedures that we designed to ensure that we record, process, summarize and report in a timely manner the information we must disclose in reports that we file with or submit to the SEC. Tony J. Sorcic, President and Chief Executive Officer, and Todd D. Fanning, Senior Vice-President and Chief Financial Officer, reviewed and participated in this evaluation. Based on this evaluation, Messrs. Sorcic and Fanning concluded that, as of the date of their evaluation, our disclosure controls were effective. |
(b) |
Internal controls. There have not been any significant changes in our internal accounting controls or in other factors during the quarter ended March 31, 2008 that could significantly affect those controls. |
23
INDEX TO EXHIBITS
Exhibit |
Exhibit |
|
|
31.1 |
Certification of Tony J. Sorcic required by Rule 13a-14(a). |
|
|
31.2 |
Certification of Todd D. Fanning required by Rule 13a-14(a). |
|
|
32.1 |
Certification of Tony J. Sorcic required by Rule 13a-14(b) and Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350. |
|
|
32.2 |
Certification of Todd D. Fanning required by Rule 13a-14(b) and Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350. |
24